The British pound has been one of the worst performing currencies this week. Of course that doesn't say much when most of the majors have been quietly consolidating. The combination of weaker economic data, post M&A flow hangover and extreme positioning has made it difficult for the currency to rally and has instead encouraged profit taking near 2.5-year highs in the GBP/USD. Although manufacturing production accelerated in the month of January, industrial production growth slowed to 0.1% from 0.5%. On a year over year basis, IP still expanded by 2.9% versus 1.9% expected. With the Verizon-Vodafone M&A deal no longer providing support to sterling, the currency is vulnerable to additional profit taking this week.
The following chart shows that speculative long positions in the British pound hit a 1-year high last week. Current positions are near their 5-year extremes, which makes GBP/USD particularly vulnerable to a sharp sell-off. In this chart, we highlighted points of reversal in positioning and how they have corresponded with nasty reversals in the GBP/USD. Coincidently, positioning topped out not far from current levels in past years. With only the trade balance report scheduled for release this week, additional profit taking could drive GBP/USD below its 3-week low of 1.6585, which would pave the way for a move down to 1.64.
Kathy Lien, Managing Director of FX Strategy for bkassetmanagement.com.